Revisiting the Wyckoff Spring

For you students of technical analysis arcana: This past week's action is what could be described as a Wyckoff Spring.

Who is Wyckoff, and what is is his spring? Richard Wyckoff was a
trader from the 1920s. He penned several of my favorite Market books
(mentioned previously here), before setting up the "Stock Market Institute" in Phoenix to study technicals and markets.

A Wyckoff Spring occurs when a market average (or stock) falls below
its trading range, and makes a new "panic low" -- and then "springs"
back into its previous range.Its a relatively rare situation, one that
is usaully associated with a sell off. That is a rather apt description
of the entire week's action.

VIX Slips Below 50

Who could have predicted that traders would be celebrating the
decline of the Chicago Board Options Exchange’s volatility index below
the 50 mark?

We saw the VIX peak late October, coincident with the worst of the
credit freeze and market panic. The VIX closed yesterday at 47.76, down
11%, for the first close below 50 after an incredible run of 21
consecutive days above 50.

The VIX peaked late October, coincident with the worst of the credit freeze and market panic.

Volatility has begun to diminish as investors reduce their worry
about the state of the markets, even as the outlook for the economy
worsens.

One thing we learned: The prior measure for volatility "highs"
around 30 are not reliable entry points for bad dislocations. They
have in the past signaled sufficient panic that you could buy in, but
that is a level that traders may no longer find much faith in.

Peter Boockvaar reminds us that the VIX has closed above 30 for 37
consecutive days, and may still surpass the period in 1998 during the
Long-Term Capital Management debacle where it was above that mark for
50 days.

The current worldwide liquidity crisis may yet take a long time to
stabilize . . . and I would expect the VIX to also take an equal amount
of time to find a more moderate level.

Did October 2008 Panic Exceed the 1987 VIX Levels ?

In all of the end of month mayhem last week, you may have missed the
above Bloomberg chart-of-the-day on Friday. It showed something that
was rather fascinating: Option traders have been at a more elevated
level of fear for a longer period of time than during the 1987 crash.

The comparison is one between short and sharp (1987) versus high and
protracted (2008). Its between a brief peak and a prolonged elevation.

Here's the Ubiq-cerpt:™

"U.S. stock investors have been more fearful for longer
than they were in the weeks before the October 1987 market crash,
according to a gauge known as the old VIX.

The CHART OF THE DAY shows the closing values for this indicator,
the Chicago Board Options Exchange S&P 100 Volatility Index, in the
past two months (the white line) and the same period 21 years ago (the
red line).

This year, the old VIX climbed from the start of September through
Oct. 11, when it surpassed 100 in intraday trading for the first time
since the month of the crash. Back in 1987, the index stayed below 30
until the Friday before stocks tumbled.

The indicator is derived from prices of options on the S&P 100,
as its name suggests. The current version, introduced five years ago,
uses S&P 500 options and includes more contracts in the
calculations. Their readings tend to be similar. The VIX closed
yesterday at 62.90."

"How far back" are we?

He wanted to attempt to see how bad things are in the stock market, so he generated the chart below. It compares current pricews (top) with the Dow price in terms of the number of years since the first occurrence of that price (bottom, red)

I liked the way this puts the current historical price chart into a somewhat different perspective.

Sentiment Update: Go Blue !

How is sentiment lately? It is insanely negative. I am going to give you three different factors -- anecdotal, data driven, and media.

1) For most of the past 2 years, I have invariably been the most bearish guy in the room. This has been true whether I was at a meeting or conference, on TV, in print, or simply out having dinner. The lone exception were anytime Nouriel Roubini was also present. Then I would be the 2nd most bearish person in the room.

Lately, I am the most bullish guy in the room -- and I have to tell you, that is just plum weird to me. This week, there were 4 separate occasions when I was in meetings, on TV, at a lunch, at a private dinner. Its very odd.

2) The October University of Michigan Confidence number is just shy of the lowest level since 1980. University of Michigan Consumer Confidence level
is at levels not seen since the end of the 1970's bear market. (Hence, my "Blue" double entendre). The telephone survey is compiled last week and as late as yesterday. It
certainly reflects much of the market action over the past 2 weeks.

That's right, we are as negative as anytime we have been over the entire course of the 1982-2000 Bull, or the start of the 2000-03 bear. Worse than the 1990 recesson, worse than LTCM or the Thai Baht crisis, worse than the tech and dot com crash, worse than 9/11.

I keep hearing people say (anecdotally) there isn't enough Bearish sentiment, but with equities nearly cut in half, and near 30 year lows at UoM Sentiment, this is just about as bearish as it gets. And that's bullish for equities.

3) On a media note, beyond the Soup lines on the cover of Time magazine, this weekend I have to Tivo "Fall of the Fat Cats" on CNN.

Programs of that sort are more anecdotal support for excessive Bearishness . . .

Disclaimer

Disclaimer

The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.